Adopt Resolution No. 2004- , amending Resolution 2004-45, approving the City’s budget for FY04-05, to increase General fund revenues in the amount of $2,214,677, based upon an increase of $1,539,157 for Property Tax In-Lieu of VLF, a decrease of General fund revenues in the amount of $165,000 for Golf tax revenue and an increase General fund revenues in the amount of $840,520 resulting from the sale of the Tyler property.

EXECUTIVE SUMMARY:

FY03-04 Baseline Budget:

At a City Council Budget Workshop on April 14, 2003, the City Council directed staff to prepare a "baseline operating budget" with the assumption that the City would not receive Vehicle License Fee ("VLF") backfill revenue of about $1.6 million during FY03-04. The expected loss of VLF backfill revenue in FY03-04 required drastic cuts in the City’s expenditure budget. VLF revenue for FY03-04 and FY04-05 remained in question until the recent adoption of the State budget for FY04-05. The caution proved justifiable because the City lost nearly $1 million of VLF backfill during FY03-04.

The adopted FY03-04 City "baseline budget" included reductions and cuts of the annual residential overlay and slurry seal program, as well as proposed sewer, storm drain and other capital projects totaling about $1.2 million. The adopted FY03-04 budget also included the elimination of the annual $100,000 contribution to the Building Replacement fund and minor reductions in other programs, including travel for conferences and grants to civic, cultural and social organizations.

2004 Model – Revision 1:

Finance Staff prepared and submitted the 2004 Five Year Financial Model – Revision 1 (the "2004 Model – Revision 1") to the City Council on September 7, 2004. The 2004 Model – Revision 1 was prepared for the purpose of including revenues restored by the adoption of the FY04-05 State Budget; to show the impact of restoring some of the programs previously eliminated from the City’s FY03-04 Budget and to make other minor adjustments of revenues and expenditures not known at the time the original 2004 Model was prepared.

The 2004 Model – Revision 1:

Included approximately $1.5 million annually of Property Tax In-Lieu of Vehicle License Fee (VLF) revenue over the five years of the 2004 Model – Revision 1, which was a result of the State’s FY04-05 Adopted Budget. A budget adjustment accompanies this staff report for this increase of General fund revenue.

Included capital expenditures associated with the restoration of the City‘s residential pavement management program totaling about $6.7 million through FY08-09.

Included a reduction of FY04-05 Golf tax revenue of $165,000 in FY04-05 due to the temporary closure of Trump National (formerly known as Ocean Trails). A FY04-05 budget adjustment accompanies this staff report for this decrease of General fund revenue.

Included resumption of the annual transfer of $100,000 from the General fund to the Building Replacement fund in FY05-06 through FY08-09.

Did not include the potential receipt of the FY02-03 VLF Backfill Gap loan from the State. The VLF Backfill Gap loan is scheduled to be repaid to the City in FY06-07 and is estimated to be $726,000. The State Legislative Analyst’s Office has estimated that the State Budget shortfall may exceed $17 billion over the next two years. Therefore, due to the uncertainty of its timely collection, Staff has not included the Backfill Gap Loan repayment in the 2004 Model. See FY02-03 VLF Backfill Gap Financing Program on page 6 of this Staff Report.

Did not include revenues from the proposed Long Point Resort project, due to the uncertainty its completion, as well as the timing of its completion.

2004 Model – Revision 2:

The accompanying 2004 Model – Revision 2 includes the following significant revisions:

The fiscal impact of all FY04-05 budget adjustments approved by the City Council through the date of this staff report.

The favorable budget variance of $2,671,811 resulting from closing the books and completion of the audit for FY03-04.

The inclusion of budget adjustments in the General fund during FY04-05 totaling $634,000 for additional legal services related to litigation.

Due to additional litigation costs over the last five fiscal years, City Attorney program costs have been increased from approximately $722,000 to $1,000,000 annually for the remaining years of the 2004 Model - Revision 2. The combined total impact of additional litigation costs in FY04-05 and the remaining years of the Model is a General fund balance decrease of $1.8 million.

Based upon new information provided by CalPERS, Estimated General Fund Reserves have been decreased by about $400,000 through FY08-09 based upon a rate increase for FY05-06 and FY06-07.

Estimated General Fund Reserves have been decreased by about $277,000 through FY08-09 for estimated additional costs resulting from the proposed purchase of about 700 acres of open space land in conjunction with the NCCP.

An increase of General fund reserves of $840,520 resulting from the sale of the Tyler property.

A reconciliation of Estimated General Fund Reserves through FY 08-09 based upon the revisions included in 2004 Model – Revision 2 vs. 2004 Model – Revision 1 follows:

Reduction of Estimated General Fund Reserves Through FY08-09

Nothing has been included in the 2004 Model – Revision 2 for the proposed Water Quality And Flood Protection Program (storm drain renewal and maintenance) and increased traffic enforcement. Based upon the assumptions contained in the 2004 Model – Revision 2, Estimated General Fund Reserves will decrease by about $5 million through FY08-09 to about $8.8 million as of June 30, 2009. Staff also believes that the inclusion of about $2.6 million for cleaning, CCTV inspection and estimated line-segment replacement through FY08-09 is a worst-case scenario.

Time did not permit completion of this Staff Report prior to the December 15, 2004 meeting of the FAC. Therefore, the FAC had no basis to revise its Recommendation that it re-affirmed on August 25, 2004. Staff will communicate any comments or recommendations that the FAC may have, if any, during its presentation on December 21, 2004.

BACKGROUND AND DISCUSSION:

Overview

The 2004 Model is a financial schedule prepared by the Finance and Information Technology Department under the supervision of the City Manager. City Council Policy No. 18 requires preparation of the Model. The 2004 Model includes all funds of the City and its component units (Redevelopment Agency and Improvement Authority). The requirements of Municipal Code Section 3.30.180 were met when the City Council received and filed the 2004 Model at the April 20, 2004 City Council meeting.

The City’s Five-Year Financial Model is updated annually at the time of budget preparation. However, on occasion, the City’s Five-Year Model is updated during the fiscal year when "significant changes" could impact the City’s financial position.

Fiscal Impact of FY04-05 Adopted State Budget and Proposition 1A

The Governor signed the FY04-05 State Budget on July 31, 2004. The FY04-05 State Budget includes components of a "local government agreement" framed by representatives from local government and the California League of Cities and the Governor. Local governments agreed to help finance the State’s deficit by agreeing to reductions in State shared revenues in exchange for constitutional protection of local government revenues. The protection of local government revenues (property tax, sales tax & VLF) is in the form of a constitutional amendment (Proposition 1A) that was passed by the voters of California on the November 2, 2004. The major components of the local government agreement and its impact on the City are listed below.

Local Government State Shared Revenue Contribution:

The State’s FY04-05 Budget includes a $1.3 billion contribution of State shared revenues from cities, counties, special districts and redevelopment agencies in both FY04-05 and FY05-06. The City will lose approximately $348,000 in General fund property tax and approximately $63,000 in redevelopment agency property tax increment in both FY04-05 and FY05-06, for a total estimated loss to the City of approximately $822,000 over the two-year period.

Property Tax In-Lieu of Vehicle License Fees:

Prior to 1999, State residents paid a Vehicle License Fee ("VLF") of 2% of the market value of their respective vehicles to the Department of Motor Vehicles. This VLF funding is passed through to cities and counties throughout California. The State legislature reduced the VLF tax rate from 2% to 0.65% over a period of three years ending in 2001. The same legislation also guaranteed cities and counties that the State would "backfill" the difference between the two rates.

The property tax in-lieu of VLF component of the State’s FY04-05 Budget eliminates the backfill portion of the VLF payment and replaces it dollar for dollar with property tax taken from the Educational Revenue Augmentation Fund (ERAF). At this time, the City does not expect to realize any loss of revenues from the property tax in-lieu of VLF component of the State’s Budget. The property tax in-lieu of VLF is permanent and took effect on July 1, 2004. Property tax in-lieu of VLF increases each year with each jurisdiction’s change in their gross assessed value of taxable property. A FY04-05 budget adjustment of $1,539,157 accompanies this Report for this increase of General fund revenue.

Repayment of FY02-03 VLF Backfill Gap

On June 19, 2003, due to the State budget crisis, the VLF tax rate was restored to the pre-1999 rate of 2%. Due to the increase of the VLF tax rate, the need for the State to backfill local governments was eliminated. On November 17, 2003, the new Governor issued an executive order lowering the rate back down to 0.65% and reinstating the backfill to local governments. However, during the time it took the DMV to initiate the increase (approximately three months), the State did not make VLF backfill payments to local governments. The State Legislature has characterized the amount of VLF backfill revenues it failed to pay to cities and counties during this three-month period as a loan.

The State Controller’s Office has estimated the City’s VLF Backfill Gap loan to be about $726,000. In accordance with the State’s FY04-05 Budget, the Backfill Gap Loan is scheduled to be repaid by August 15, 2006. The State Legislative Analyst’s Office (LAO) has estimated that the State Budget shortfall may approximate $7 billion for FY04-05. The LAO has also estimated that if action is not taken to correct the budget shortfall, the State faces persistent annual operating deficits that peak at nearly $10 billion in FY06-07 before narrowing in subsequent years. Therefore, due to uncertainty of its timely collection, Staff has not included the Backfill Gap Loan repayment in the 2004 Model.

FY02-03 VLF Backfill Gap Financing Program

Authorized under SB 1096, the California Statewide Communities Development Authority ("CSCDA") has instituted a VLF Gap Loan Financing Program ("VLF Program") that enables local agencies to sell their VLF receivable to CSCDA for an upfront fixed price between 90-96% of their receivable. CSCDA is planning to issue bonds and use the proceeds to purchase the VLF receivables. CSCDA will pledge the VLF receivables to secure payment on the VLF Bonds. A Local Agency’s sale of its VLF receivable is irrevocable and investors will have no recourse to the Local Agency if the State does not repay the VLF gap loan.

Upon delivery of the bonds, CSCDA will make available to each Local Agency a fixed dollar payment. The payment will be equal to an Agency’s VLF gap loan amount less capitalized interest costs, credit enhancement fees and bond issuance costs. Staff has submitted a VLF Program Participation Form, which will create the opportunity for the City to engage in dialogue with the CSCDA to ascertain whether the VLF Program is appropriate for the City. The VLF Participation Form does not obligate the City to participate in the VLF Program. If the VLF Program is deemed appropriate for the City, the City Council will have to adopt a resolution to participate in the VLF Program. Finance Staff will continue to research the VLF Program and may bring the City Council a recommendation to participate in the VLF Program.

Propositions 57 and Associated "Triple Flip":

Proposition 57, the one time Economic Recovery Bond of $15 billion, was approved by voters on March 2, 2004. The $15 billion will be used to finance the State’s accumulated General fund deficit carried over from FY02-03, FY03-04 and possibly a portion of the expected FY04-05 deficit.

The "Triple Flip", used to secure the $15 billion bond issue, redirects 0.25% of the sales and use tax going to cities and counties throughout the State. The State will then replace the lost revenues on a dollar-for-dollar basis with property tax taken from the ERAF. At this time, the City does not expect to realize any loss of revenues from the Triple Flip. The Triple Flip took effect on July 1, 2004. The Triple Flip will be discontinued when the Economic Recovery Bonds are retired. The property tax in-lieu of sales tax increases each year in relation to the sales and use tax each jurisdiction would otherwise have received.

Constitutional amendment (Proposition 1A) Elements:

As stated above, local governments agreed to help finance the State’s deficit by agreeing to reductions in State shared revenues in exchange for constitutional protection of local government revenues.

Property Tax:

Proposition 1A prevents the Legislature from reducing the combined property tax shares of cities, special districts, and the county, except to borrow the funds on a temporary basis to address a "severe State fiscal hardship". However, the State will retain the authority to transfer property taxes among cities, counties, and special districts with a 2/3 voteof the Legislature. Previously, the State could make this type of transfer with a majority vote of the Legislature. Additional restrictions on the State to borrow local government property tax would include:

The FY03-04 VLF Backfill GAP Loan must be repaid before any additional borrowing could occur;

The loan could only occur twice within a 10 year period;

The loan must be repaid with interest within 3 years, and prior loans must be repaid before borrowing could occur a second time within 10 years;

The amount of the loan is limited to no more than 8% of the total amount of property tax allocated to cities, counties, and special districts in the previous fiscal year; and

The loan could only occur with a 2/3 vote of the Legislature.

Sales Tax:

Proposition 1A prevents the State from taking, borrowing or shifting sales and use taxes from local governments. Regarding the Proposition 57 bonds, Proposition 1A also prevents the State from:

Extending the period during which the one-quarter cent sales tax is suspended;

Failing to pay the property tax in-lieu of sales tax during the period of suspension; and

Failing to restore the full sales tax rate when the Proposition 57 bonds are repaid.

Vehicle License Fees:

Proposition 1A constitutionally guarantees VLF revenue to cities and counties at the rate of 0.65% of the value of a vehicle. This is a significant change for cities and counties, because the constitution did not previously guarantee VLF revenues to cities and counties at any specific rate.

If the Legislature lowers the VLF rate below 0.65%, Proposition 1A requires the Legislature to enact a law that provides for an allocation to cities and counties equal to the difference between the revenues received from the 0.65% rate and the lower rate.

Fiscal Impact of FY04-05 Adopted State Budget on City General Fund Revenues

At the time the City’s FY04-05 Budget was adopted, it was unclear if the City would receive VLF Backfill revenues. Therefore, VLF revenues were conservatively estimated to include only the "non backfill" portion, or, as stated above, at the State’s 0.65% rate.

Although the City will not receive VLF Backfill from the State, the State’s FY04-05 Budget includes a Property Tax In-Lieu of VLF Backfill component. The State’s FY04-05 Budget eliminates the backfill portion of the VLF payment and replaces it dollar for dollar with Property Tax In-Lieu of VLF that will be taken from ERAF funds. Table 2 below details the increase in General fund monies the City will receive based on the State’s FY04-05 Adopted Budget. Staff has included a budget adjustment in the amount of $1,539,157 for this unanticipated revenue source with this staff report.

Infrastructure Renewal and Maintenance

On November 30, 2004, Staff presented a plan for infrastructure renewal and maintenance to the City Council and the Finance Advisory Committee in a Joint Workshop. The following excerpts provide an overview regarding the plan presented:

Proposed Water Quality And Stormwater Protection Program

A user fee rate system was prepared in accordance with the Preliminary Rate Analysis developed by Harris & Associates, based upon parcel size, impervious cover on the property (such as buildings and concrete) and parcel use (i.e. residential and commercial using the County Hydrology Manual). Harris & Associates would review the impervious factors of large commercial parcels, government-owned parcels and update the County parcel database prior to finalizing the Rate Analysis for presentation to the City Council at a rate hearing.

The Preliminary Financial Model includes all 56 renewal-projects identified in the Storm Drain Master Plan update with a total cost of $25 million scheduled over the initial 20 years of the proposed Water Quality And Flood Protection Program. As described in the Staff Report to the City Council, dated June 15, 2004:

"Not all the projects are of equal importance. Each project was reviewed and a priority was been assigned using the following criteria:

Priority One

Projects were assigned a Priority One if it was determined that failure of the storm drain to convey the 50 year storm would result in flooding of private property. Most priority one projects have experienced flooding in the past.

Priority Two

Projects were assigned Priority Two if it was determined that failure of the storm drain to convey the 50 year storm would result in significant street flooding or bluff or canyon erosion that over time could threaten structures. Some priority two projects have experienced flooding in the past.

Priority Three

Project were assigned a priority Three if it was determined that failure of the storm drain to convey the 50 year storm would result in inconsequential street flooding which would not, even over time, threaten structures."

Although the City’s Water Quality And Flood Protection consultant, AKM, recommended that all 56 storm drain projects be completed, the Team may elect to defer the Priority Three projects indefinitely, possibly spreading the remaining 38 projects over 30 years, rather than 20 years. The Team would consider risk, financial resources and engineering considerations while finalizing the Financial Model.

The Preliminary Financial Model includes a provision for Water Quality And Flood Protection facility lining projects over 19 years with a total cost of $4.6 million. The Team may elect to increase or decrease the provision for storm drain lining or decrease or increase scheduled storm drain renewal projects, prior to finalizing the Financial Model.

The Preliminary Financial Model includes a provision for the installation of approximately 600 catch basin filtration devices over 5 years with a cost of $82,524 each year to reduce pollutants and assist in compliance with National Pollutant Discharge Elimination System (NPDES) and Clean Water requirements.

Subject to approval of the proposed user fee by property owners, The Team has included a one-time transfer of $2 million of General Fund Reserves to a new Water Quality And Flood Protection Program enterprise fund in early FY05-06. The proposed transfer would fund the first project (Sunnyside Ridge) before user fees are collected in FY06-07. The transfer would also contribute to the cost of Priority One projects in the early years of the Water Quality And Flood Protection Program. In fact, a portion of the proposed transfer of $2 million will reduce the user fee for each property owner by an average of approximately $6 per year.

The Preliminary Financial Model was prepared using both Pay-As-You-Go and Debt-Financing scenarios. Using the Pay-As-You-Go scenario, the annual user fee pays for the entire annual cost of the Water Quality And Flood Protection Program, including Water Quality And Flood Protection Program reconstruction projects, installation of catch basin filtration devices, maintenance, and administrative costs. The Debt-Financing scenario is based upon the assumption that bond debt would be issued every three to six years to provide financing for reconstruction projects.

The Storm Drain Master Plan would be updated at least every five years leading to a revision of the Financial Model based upon the identification of new Water Quality And Flood Protection Program projects.

The user fee rate would be reviewed and set annually at a noticed Public Hearing of the City Council after review of an Annual Fee Report outlining the estimated annual costs of the program.

User fees would be billed using the County property tax rolls beginning with FY06-07, collected and deposited into a dedicated Water Quality And Flood Protection Program enterprise fund to enable program accountability and separation from all other financial activities of the City.

Sewer System

The Sewer Master Plan identified few deficiencies and noted that the overall condition of the sewer system is fair. Unlike the Storm Drain Master Plan, the Sewer Master Plan includes an extrapolated estimate of $2.1 million for line segment replacement based upon a sample of only 6% of the system. As the sewer system does not appear to be in need of immediate large-scale reconstruction, the Team concluded that further investigation of the entire sewer system at a cost of $1.1 million is necessary to determine the full extent of required line segment replacement. In addition, Staff is currently pursuing the County’s willingness to perform additional cleaning and ability to complete line segment replacement projects within an acceptable period of time. The extent of the County’s responsibility and ability to satisfy sewer system needs has not been finalized at this time. The additional information obtained from further cleaning and CCTV inspection will enable the City to fully identify sewer system needs to the County.

The Team concluded that the City could pay for the entire cost of cleaning and inspection of the sewer system over the next five years as a "worst case scenario", if necessary. Staff believes that General Fund Reserves are sufficient to pay for the total cost of about $3.2 million, if necessary. The need for a sewer user fee could be revisited at a later date, perhaps at the end of the five-year period depending on the results of the inspection program and determination of the County’s ability to satisfy sewer system needs.

Streets And Roadways

Based upon the Pavement Management Program report, dated June 1, 2004, prepared by Harris & Associates, Staff included the estimated costs of arterial and residential streets and roadways over the five years ending FY08-09 in the 2004 Five-Year Financial Model – Revision One. Fieldman & Rolapp & Associates reviewed the Pavement Management Program report, as well as Staff’s inclusion in the 2004 Five-Year Financial Model – Revision One, dated September 7, 2004. Based upon its review, Fieldman, Rolapp & Associates, and other members of the Team determined that General Fund revenue resources are sufficient to finance the estimated costs of arterial and residential streets and roadways through FY08-09.

Staff expects to present additional information regarding the proposed Water Quality and Stormwater Protection program to City Council on January 4, 2005.

The Adopted FY04-05 Budget, including all City Council approved budget adjustments.

The 2004 Model – Revision 2 includes the segregation of funds as follows:

General fund – The General fund balance represents the City’s unrestricted reserve monies. These monies may be used for any City expenditure, including general operations of the City.

Funds restricted by action of the City Council – The fund balances of these funds represent monies restricted by City Council action for a particular purpose. The funds were formed with transfers from the General fund. These monies may be returned to the General fund or used for other purposes (e.g. infrastructure projects) upon the action of the City Council.

Funds restricted by law or external agencies – The fund balances of these funds represent monies restricted by law or external agencies, such as the Federal Government, State of California, or Los Angeles County. These monies can only be used for the purpose outlined by the restricting agency in accordance with the terms and conditions set by legislation and voter ballot measures.

The 2004 Model – Revision 2 includes several schedules organized as follows:

Exhibit A Summary – 2004 Five-Year Financial Model (One Page Summary)

Exhibit B 2004 Five-Year Financial Model By Fund

Exhibit C CIP Plan Project Expenditures

Exhibit D Summary Of Fund Transfers

Complete List of 2004 Model – Revision 2 Assumptions

General Assumptions

The Adopted FY04-05 Budget is the basis for the first year of the 2004 Model - Revision 2.

Most expenditures have been increased annually using a factor of 3.12% beginning in FY05-06 and continuing through FY08-09.

Most revenues have been increased annually based upon a general increase of 2%. Certain revenue categories (e.g. projected changes in permit activity and retail sales) have been increased based upon staff’s discussions with other agencies, reports provided by other agencies or staff’s own expectations. The factors (% rate of change) are presented on Page 1 of the 2004 Model - Revision 2 using an alphabetical index (a through l) and are referenced throughout the 2004 Model - Revision 2.

Assumptions Specific to the Funds and Program Revenues and Expenditures Included In The 2004 Model - Revision 2

Excluding the property tax in-lieu of VLF and Sales Tax components of the FY04-05 State Budget discussed above, it is assumed that the City's share of property tax will remain constant at approximately 6.35% of the one-percent rate assessed by the County.

The City’s actual increase in Property tax revenues from FY00-01 through FY03-04 has averaged slightly less than 7%. However, considering the cyclical nature of the real estate market, staff has conservatively increased Property tax revenues at the rate of 2% in FY05-06 through FY08-09.

The 2004 Model - Revision 2 assumes thecontinuation of the 3.0% utility user tax through FY08-09. Based on previous conversations with telephone company representatives and recent newspaper articles, staff is concerned that UUT derived from telephone usage may decrease in the future due to the movement toward cellular phones resulting in an overall reduction of phone costs to consumers and therefore, utility users tax revenue to the City. However, staff believes that increases associated with other utilities, such as cable television, gas and electric, will likely offset losses from the decrease in telephone usage. Therefore, no increases or decreases have been estimated for the remaining years of the 2004 Model – Revision 2.

Trump National will be closed to all golfers from August 19, 2004 to January 15, 2005. Based on the conservative methodology used in the preparation of the 2004 Model – Revision 2, staff has assumed that Trump National will be closed for the remainder of the fiscal year and reopen with the full use of all eighteen holes for FY05-06. Therefore, only receipts for July of 2004 ($13,500) are shown in the 2004 Model - Revision 2 for FY04-05. Golf Tax collected by the City is a percentage of golf operations revenue. Staff has conservatively estimated Golf Tax revenue by increasing estimated FY03-04 Golf Tax revenues at a rate of 2% annually in FY05-06 through FY08-09. A FY04-05 budget adjustment of $165,000 accompanies this staff report for this decrease of General fund revenue.

The residential street overlay program is primarily funded with General fund monies. Expenditures for this program were included in the original FY03-04 Budget at a reduced rate (less than half of the annual work recommended by the Pavement Management Program). As described previously, the Adopted FY04-05 budget includes a one-time transfer of $1.1 million from the General fund to the Capital Improvement Projects fund for residential street overlay projects.

The 2004 Model - Revision 2 includes expenditures for overlay projects in FY05-06 through FY08-09, as recommended by the Pavement Management Program, including expenditures for a Residential Overlay/Slurry Seal, Arterial Slurry, and Arterial Overlay Program. Funding for each of these Programs is based upon the Pavement Management Program that recommends a schedule of roadway maintenance based upon pavement management principles. Funding for the Residential Overlay/Slurry Seal program varies greatly year-to-year. The variability of cost is due to the fact that the program constructs improvements, on a cyclical basis, in seven zones of the city. The square footage of roadway surface, and thus costs, vary greatly from zone to zone. The arterial roadway projects included in the CIP fund of the 2004 Model – Revision 2 are financed with a combination of Proposition C (transit) fund monies and Federal highway grant monies.

$1 Million has been included in the City’s budget for the proposed purchase of about 700 acres of coastal hillside along Palos Verdes Drive South ("PVDS") in cooperation with the PVPLC. In the event the purchase is completed, the open space land would be transferred to the Reserve established by the NCCP Subarea Plan. The City would own the land and the PVPLC would hold the conservation easements and have the responsibility for managing the Reserve. The PVPLC has committed to raising about $6 Million towards the purchase. The City and the PVPLC are striving to raise the remainder of the funds from State and Federal grants totaling approximately $20 Million. Based on a staff report prepared by the Public Works Department, dated March 4, 2003, the $1 Million budgeted by the City will be funded in the amounts of $538,878, $332,500 and $128,622 from Proposition 12, Proposition 40 and Measure A funds, respectively.

On August 31, 2004, the City Council approved the NCCP Subarea Plan. On November 3, 2004, the City Council approved the agreement to purchase approximately 3 acres of land in Agua Amarga Canyon and approximately 424 acres of land within the Portuguese Bend Area of the City. If the 424-acre open space purchase transaction is not completed, the $60,000 deposit will be used to purchase the 3 acres of land in Agua Amarga Canyon only. Staff is currently working towards the purchase of the remaining open space along PVDS in cooperation with the PVPLC.

Based on these recent developments, the additional costs related to the Proposed NCCP and open space purchase have been included in the 2004 Model – Revision 2. Finance and information Technology Staff wrote a separate staff report to the City Council, titled "Proposed Natural Communities Conservation Plan And Proposed Purchase Of Open Space – Fiscal Impact", dated August 31, 2004 detailing these additional costs.

The proposed NCCP and open space purchase includes a funding commitment for maintenance of the Reserve by the PVPLC. An annual Habitat Restoration fund expenditure of $100,000 has been included in all five years of the 2004 Model - Revision 2. The Habitat Restoration fund expenditures are partially funded with an annual General fund operating transfer in the amount of $76,752 for FY04-05 through FY07-08 and $94,860 in FY08-09.

The City Council approved the Proposed Long Point Resort Project on August 28, 2002. The Coastal Commission approved the Proposed Long Point Resort Project in the fall of 2003. Due to the uncertainty of project completion, as well as its timing, no revenues (e.g. transient occupancy tax, sales tax, developer fees, etc.) or expenditures have been included in the 2004 Model - Revision 2.

The Long Point Resort Hotel developer is seeking to amend the project’s conditions of approval. The developer seeks to amend the project conditions to allow 50 hotel rooms and the bungalows to be sold to private individuals or entities with restrictions that regulate the use and duration of stay and to establish a 1% Property Transfer Fee with proceeds of the fee to go to a non-profit corporation. The proposed changes would reduce the project’s generation of estimated Transient Occupancy Tax, while increasing the project’s generation of estimated Property Transfer Fees. The developer has calculated revenue increases to the City from the proposed changes totaling $278,766 in Operating Year 4 (the first year the Developer’s projections assume stabilized occupancy rates). The City Council approved the amendments to the conditions of approval at the August 17, 2004 City Council meeting. The California Coastal Commission must also review and approve the proposed revisions.

The parks and trails amenities included in the Conditions of Approval of the Long Point Resort Project satisfy any and all of its Quimby requirements. Due to the uncertainty of completion, a Quimby fund developer fee for the Point View residential project has not been included in the 2004 Model - Revision 2.

EET revenue of approximately $768,000 has been included in the 2004 Model - Revision 2, including Crestridge Villas ($256,000), approximately ninety new miscellaneous dwelling units over five years ($225,280), Trump National residential units ($181,760), Ocean Front residential units ($71,680), and a 13-lot subdivision ($33,280). EET revenue may only be used for improving or purchasing City owned facilities. Due to the uncertainty of any development project, as well as its timing, no expenditures have been included in the 2004 Model - Revision 2 utilizing this revenue source.

Due to the uncertainty surrounding the Point View residential and Long Point Resort projects, no EET revenue for those projects has been included in the 2004 Model - Revision 2.

In 1997, the City Council approved the establishment of an in-lieu affordable housing fee pursuant to the City’s General Plan and Development Code. The fee is charged to developers of large commercial and residential projects, in-lieu of the developer constructing on-site affordable housing units, as required by State Law. Because the decision whether or not to accept Affordable Housing In-Lieu fees vs. requiring affordable housing to be provided is decided for each respective project, no In-Lieu fees have been included in the 2004 Model - Revision 2.

Currently, the LAIF investment interest rate hovers around 1. 9%. The Adopted FY04-05 Budget includes an assumption that the LAIF interest earnings rate will be 2.25%. In the preparation of the 2004 Model - Revision 2, staff has used an investment interest rate of 2.25% for FY05-06, increasing it by 0.25% for each fiscal year thereafter. If investment interest rates do not significantly increase, Staff will likely present a budget adjustment to the City Council for a decrease in interest income.

An amount of $75,000 has been included in FY04-05 through FY08-09 for Miscellaneous Drainage. The intended use of this miscellaneous allocation is to provide for small emergency repairs. See the previous Infrastructure Renewal and Maintenance section of this Staff report.

The actual cost to implement the National Pollutant Discharge Elimination System (NPDES) program, a program administered by the Regional Water Quality Control Board to control storm-water and urban runoff from municipalities, is not definitely known at this time. In the event the cost of NPDES compliance becomes excessive, the City could elect to offset all, or a portion, of these costs with the establishment of user fees.

At its June 15, 2004 meeting, the City Council approved the plans and specifications for the construction of an elevator at City Hall. The total amount authorized by the City Council for the elevator, including the 10% contingency factor, is $564,500. The elevator will be built with CDBG funds. No General fund monies will be used to construct the elevator. CDBG fund expenditures are completely reimbursed with CDBG grant monies; therefore, the CDBG fund balance is always projected to be zero, regardless of the level of expenditure activity within the fund. The City Hall elevator in expected to be completed in early 2005.

The Director of Public Works presented an overview regarding the Tarapaca Landslide to the City Council on April 15, 2003. The staff report described the following: "GeoSyntec Consultants, Inc. recently completed its investigation and concluded that a landslide exists along the eastern side of the San Ramon canyon just east of the PVDE switchbacks. The landslide, named the Tarapaca Landslide, is an active landslide that borders the eastern edge of the larger and inactive South Shores Landslide. The Tarapaca Landslide is presently sliding westerly into the San Ramon canyon, partially blocking stream flow, and contributing sediment for transport to downstream areas of the canyon."

The landslide is principally within the City; however, a portion of the landslide lies within the City of Los Angeles. The potential sharing of the liability and cost for the project between the City, Los Angeles County and the City of Los Angeles is currently being discussed by all parties. However, the City of Los Angeles has budgeted approximately $1 million for the project that has been estimated to reach at least $5 million. It is unknown if Los Angeles County is willing to provide funding for the project. Based on discussions with Public Works Staff, the City’s estimated share of the total project cost is $1.6 million. This amount has been included as a priority 1 project in the City’s Water Quality and Flood Protection Program Financial Model.

No expenditures have been included in the 2004 Model - Revision 2 for major park facilities or open space improvements. Additionally, the 2004 Model - Revision 2 does not include a provision for projects being considered by the Open Space, Planning and Parks and Recreation Task Force ("Task Force"), including:

Additional athletic fields;

A permanent home for the Peninsula Seniors;

Improvement to Upper Pointe Vicente Park (surrounding City Hall);

An Equestrian park facility; and

Improvements to the City Hall facility.

The 2004 Model - Revision 2 includes the resumption of the transfer of $100,000 from the General fund to the Building Replacement fund for FY05-06 through FY08-09.

The Adopted FY04-05 budget for the Street Maintenance fund includes about $800,000 of State apportioned Highway Users tax revenue, an operating transfer of $285,000 from the 1972 Act fund, an operating transfer of $100,000 from the General fund, an operating transfer of $312,000 from the Proposition C fund, an operating transfer of $48,000 from the Waste Reduction fund, $20,000 for miscellaneous revenues and $20,000 for sidewalk repair fee revenue, totaling approximately $1.59 Million. Street maintenance program expenditures are expected to be approximately $1.6 Million.

On December 7, 2004, Planning Staff presented a staff report to City Council regarding expenditure of Affordable Housing funds. Staff reported the following:

"Although the City has some time before its In-lieu Affordable Housing Funds need to be spent, its RDA Housing Fund will reach the $1 million threshold this month, thereby starting a 1-year deadline to come up with a program to expend its excess surplus funds and an additional 2 years to implement such a program. To avoid losing the excess funds and potentially risk financial penalties to other non-housing Agency funds, it is important to begin discussion as to what program(s) the City shall focus its resources upon."

At the December 7th meeting, the City Council instructed staff to pursue a combined program to utilize the City’s affordable housing funds for: 1) A contribution toward development of an affordable housing component as part of the RDA owned Crestridge site, and 2) Implementation of a rental subsidy program managed by a non-profit housing agency.

In March 2000, the RDA Housing Set-Aside fund purchased the Crestridge property for $702,392 with the intention to construct affordable housing on the site. State law requires the RDA to either initiate a project on the property by March 2005, or formally extend the development of a project to March 2010. If a formal extension is adopted, physical development of the project must begin by March 2010.

Proposition A funds are provided by the half-cent sales tax distributed to cities on a per capita basis. These funds are restricted and may only be used for transit services. Currently, the City uses Proposition A funds for the City’s contribution to Peninsula area transit systems (Palos Verdes Peninsula Transit Authority and Municipal Area Express). Staff estimates the Proposition A fund will build a reserve of about $638,000 by the end of FY04-05. A proposed sale of Proposition A funds in the amount of $550,000 has been included in FY05-06 in the 2004 Model - Revision 2. Based on the 1999 sale of Proposition A funds to the City of Torrance, staff has estimated the sale will be exchanged for approximately $385,000 of unreserved and undesignated General fund monies. If a city has no qualifying projects to utilize restricted Proposition A monies, they may be sold to another local agency in exchange for unrestricted General fund monies.

Staff anticipates that the Cost-Based Fee Study will be completed in early 2005. Although staff expects minor fee revenue increases will be realized in FY04-05 as a result of the Fee Study, a reasonable estimate is not known at this time. Therefore, the possible impacts of increases to cost based fees have not been included in the 2004 Model - Revision 2.

All RDA – Abalone Cove projects, including the installation of the sewer system, are completed and the fund balance has been depleted. Accordingly, no additional project expenditures are included in the 2004 Model - Revision 2.

The 2004 Model - Revision 2 indicates that the fund balance of the Improvement Authority’s Abalone Cove fund will steadily decrease over the five years of the Model. This decrease is due to a commitment to fund a portion of the Abalone Cove Landslide Abatement District (ACLAD) in the amount of $54,000 annually. Interest income on the non-expendable $1,000,000 portion of the fund balance is not sufficient to pay for the estimated annual expenditures including the ACLAD contribution.

The PVIC Expansion Project is a 7,474 square foot single story addition to the existing PVIC building. Miscellaneous remodeling will occur in the existing building for the incorporation of interpretive exhibits. As detailed in the July 6, 2004 staff report to the City Council from the Public Works Department, MTM Construction, Inc. was the low bidder at a cost of just under $5.1 million for the PVIC expansion project. The 2004 Model - Revision 2 assumes that renovation of PVIC will be completed during FY04-05.

The City’s full-time employees participate in the CalPERS defined benefit retirement system. The plan was designed to require a 14% contribution rate, based upon the sum of the 7% employer contribution and the 7% employee contribution. However, the actual contribution rate fluctuates based on CalPERS investment results.

The City’s FY04-05 Budget was based upon a contribution rate of 15%. Based upon information recently provided by CalPERS, the City’s contribution rate is projected to be 19.5% and 19.8% for FY05-06 and FY06-07, respectively. The 2004 Model - Revision 2 includes the additional costs associated with the projected rates.

Although the City is expected to realize increased CalPERS contribution rates for FY04-05 through FY06-07 due to unfavorable CalPERS investment results, it should be noted that the City has made contributions based upon a substantially lower rate over the last ten years due to favorable CalPERS investment results. The total combined CalPERS savings realized by the City over the last ten years is detailed in Table 3 below:

As detailed in Table 3 above, the City has saved more than $1.5 million due to favorable CalPERS investment results over the previous ten fiscal years. The savings were calculated based on the difference between the contribution rate of 14% compared with the rate the City actually paid. Staff anticipates that CalPERS investments will yield higher returns in the coming years as the economy improves. Therefore, staff anticipates that the CalPERS contribution rate will decrease over time.

The City’s original FY04-05 adopted budget included $700,000 for legal services. The City Council has approved two separate FY04-05 Budget adjustments totaling $634,000 for additional legal services, for a total estimated expenditure of $1,334,000. Legal costs have been estimated at $1,000,000 for FY05-06 and increased at 3.12% for the remaining years of the 2004 Model - Revision 2.

The Los Angeles County Auditor Controller (Auditor/Controller) is currently auditing the costs of Sheriff’s services provided to the 40 cities that contract with the Los Angeles County Sheriff’s Department. The Auditor/Controller has determined that the current method used to apportion costs to contract cities may be inequitable. The 2004 Model - Revision 2 does not include cost increases based on the auditor/Controller’s initial study. However, the 2004 Model - Revision 2 includes the increase of Sheriff’s costs at the annual inflationary rate of 3.12%.

It should be noted that future economic activity, legislation and policy decisions, as well as any other unforeseen circumstances could affect the City's revenue stream and expenditures during any of the years presented in the 2004 Model - Revision 2.

SUMMARY:

Nothing has been included in the 2004 Model – Revision 2 for the proposed Water Quality And Flood Protection Program (storm drain renewal and maintenance) and increased traffic enforcement. Based upon the assumptions contained in the 2004 Model – Revision 2, Estimated General Fund Reserves will decrease by about $5 million through FY08-09. Although the 2004 Model - Revision 2 does not extend through FY09-10 (the sixth year), Staff believes that Estimated General Fund Reserves may decrease further and reach a static level of about $8 million. The General Fund Reserve Policy Level (50% of Estimated Annual General Fund Revenue) is expected to be about $7.25 million at that time. Staff also believes that the inclusion of about $2.6 million for cleaning, CCTV inspection and estimated line-segment replacement through FY08-09 is a worst-case scenario.

Recommendation of the Finance Advisory Committee:

Based upon the FAC’s review of the original 2004 Model presented in March 2004, the FAC recommended the following to the City Council on April 20, 2004:

Based upon the findings of the 2004 Model, it appears the City will need to develop a dedicated revenue source in the future to: (1) Implement a plan for infrastructure renewal and maintenance (Note: the cost of sewer and citywide storm drain renewal and maintenance are not included in the 2004 Model); (2) improve park and open space facilities; and (3) enable payment of any scheduled long-term debt to finance such infrastructure renewal and maintenance.

The FAC reviewed the 2004 Model - Revision 1 on August 25, 2004. It offered several suggestions regarding presentation (rather than financial content) that have been incorporated into this staff report. Additionally, the FAC re-affirmed its recommendation included above during its meeting on August 25, 2004.

Time did not permit completion of this Staff Report prior to the December 15, 2004 meeting of the FAC. Therefore, the FAC had no basis to revise its Recommendation that it re-affirmed on August 25, 2004. Staff will communicate any comments or recommendations that the FAC may have, if any, during its presentation on December 21, 2004.